Financial Statement Analysis: Reclassifying financial statements — Reclassifying the Balance Sheet
How analysts regroup a balance sheet by liquidity or by business area to reveal working capital, net debt and invested capital.
Try 3 questions
1. What is the main purpose of reclassifying a balance sheet before analyzing it?
- Adjusting reported profit to fit tax rules
- Regrouping items to reveal liquidity or operations
- Restating every asset at current market value
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Answer: Regrouping items to reveal liquidity or operations
Reclassification leaves the figures unchanged; it reorganizes them into a scheme, by liquidity or by business area, that makes ratios and comparisons meaningful.
2. In a liquidity-based (financial) reclassification, by what criterion are assets ordered?
- How quickly they turn into cash
- Which department uses them
- How much they originally cost
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Answer: How quickly they turn into cash
The financial scheme sorts assets by how soon they become cash and liabilities by how soon they must be paid, so short-term solvency can be judged.
3. What time horizon usually separates current from non-current items in a balance sheet?
- Ninety days
- Five years
- Twelve months
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Answer: Twelve months
Items expected to be realized or settled within one year (or one operating cycle) are current; everything beyond that is non-current.
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